SA’s rating neither down nor out...
Intervention by Gordhan and Mogoeng – and institutional capacity – saves the country from junk status ... for now
It appears Finance Minister Pravin Gordhan and Chief Justice Mogoeng Mogoeng saved South Africa from a Moody’s Investors Service downgrade. At midnight on Friday, the ratings agency announced it would keep the country’s credit rating unchanged. There was relief at the Treasury, where Gordhan and his team have sustained a four-month battle to bolster confidence in SA Inc. But Moody’s altered its outlook from stable to negative, paving the way for the rating to be downgraded in the months ahead. The negative outlook is like an inspector watching your next move. Moody’s said yesterday it was optimistic about higher local growth next year and more reliable power supply.
Eskom’s new boss, Brian Molefe, has dramatically cut the pattern of load shedding, which was one reason for the faltering economy; on Friday, President Jacob Zuma pledged South Africa would “never, ever” have load shedding in future.
Moody’s liked the fiscal discipline measures announced in Gordhan’s February Budget speech – the mandarins at the Treasury have the bureaucracy’s free-spending ways on watch.
Party budgets have been slashed; travel is being whittled down and tenders are being inspected for value for money.
And South Africa’s courts and the country’s “institutional strength” also got a thumbs up as key elements to fighting growing corruption.
“In Moody’s opinion, the Constitutional Court judgment against the president over the misuse of public funds, and Parliament’s rejection of the ruling of the Public Protector and, more recently, the high court ruling to reinstate corruption-related charges against the president ... attest to the strength and independence of South Africa’s Constitution and judicial system, and renewed attentiveness to bringing corruption out into the open and maintaining the rule of law.”
The agency assesses the South African government’s ability to repay its debt at two notches above sub-investment grade or “junk” status, while Standard & Poor’s and Fitch Ratings both have the country one notch above junk status.
Despite Moody’s stay of execution on South Africa’s rating, the prevailing expectation is that the local rating could be cut to junk during the second half of this year.
Former finance minister Trevor Manuel welcomed Moody’s decision and attributed it to Gordhan and the work he and his team have done together with business and with labour.
It was going to be a tough battle to maintain the rating.
“We are not seeing a set of actions that reflect the spirit of our laws and a political direction based on sound management …
“We have to pause and reflect and say: are we holding ourselves accountable?” Manuel said.
Mohale Ralebitso, Black Business Council (BBC) CEO, said that the BBC had no doubt about the institutional strength of the country and he was encouraged that Moody’s had come to the same conclusion.
The agency was also encouraged by the fact that the government had indicated that projects such as the construction of massive new nuclear power facilities and national health insurance would be developed only at a pace and scale that the budget allowed.
National Treasury said in response to the Moody’s announcement that the government’s decision to implement fiscal discipline to return public finances to a sustainable path, while protecting core social and economic programmes, was the correct strategy.
Ralebitso welcomed the affirmation of South Africa’s credit rating by Moody’s, but added that there was still more that needed to be done.
The government’s revenue collection was positive, but the expenditure side needed some more focus. “The government needs to cut back spending and tighten its purse strings.” Colin Coleman, managing director of Goldman Sachs, said that the Moody’s decision, while too early to declare victory, was a cause to celebrate. The report gave well-balanced coverage of the underlying issues found in the South African economy.
The Moody’s report appeared to suggest that economic growth in the country had bottomed out and Manuel said that South Africa was not growing at the levels necessary to deal with poverty.
The return of Gordhan to National Treasury, after Nhlanhla Nene was initially replaced by David van Rooyen, “demonstrated determination to bring the public finances under control”, Moody’s said.
The move to place the local rating on a negative outlook recognised the downside risks associated with the growth, fiscal and political outlook.
Moody’s announcement yesterday follows the decision by the agency on March 8 to place South Africa on a review for a downgrade and the visit by Moody’s analysts in the middle of March.
Manuel added: “Head of Moody’s SA team is Kristin Lindow, who has been on the team since 1994/95 and has been doing this for longer than anybody has. She sits in a place akin to the cockpit of a fighter jet – so the flow of information on a regular basis is all picked up.”
Moody’s growth forecast for next year, at 1.5%, is one of the more optimistic and compares with Nedbank’s estimate of 0.9%, the World Bank’s view of 1.1%, International Monetary Fund’s forecast of 1.2% and National Treasury’s projection of 1.7%.
The key issues that business and government were looking at included boosting small and medium enterprises to improve growth, labour reforms to allow for peace and productivity in the work place, and state-owned enterprise reforms, Coleman added.
There was lots of work to do, but the fruits of this work would bear in the short to medium term, he said.
The move by Moody’s could also encourage the other agencies to be more cautious about downgrading South Africa’s credit rating further.
Standard & Poor’s is set to review and issue its latest report on South Africa next month.